March 2001
Globalization Myths
by Jock Finlayson
Does economic globalization herald a "race to the bottom" as countries rush to lower their environmental, labour, and other regulatory standards in a bid to attract investment from profit-hungry corporations? To listen to many Canadian activist groups, the answer is a definitive "Yes." They believe the growth of international trade and investment is harming the environment, pushing down wages, and precipitating an across-the-board lowering of social standards in both developed and developing countries.
While the race-to-the-bottom hypothesis has many adherents, evidence in support of it is remarkably thin. If globalization truly is paving the way for lower standards, then two trends should be broadly apparent. First, countries deeply engaged in international commerce should have lower wages and impose less demanding social obligations on businesses than those that are less involved with the global economy. Second, multinational corporations should be flocking to establish operations in low-wage jurisdictions with feeble or non-existent standards.
Neither of these predictions is borne out by the data on trade flows, foreign investment activity, or the patterns of labour and environmental standards found in different countries.
To begin with, there is little evidence that trade liberalization reduces workers’ incomes or labour standards. A comprehensive study by the Organisation for Economic Cooperation and Development (OECD) reported that developing countries that dismantled trade barriers and stepped up their participation in global markets tended to have higher labour standards, less workplace discrimination, stronger trade unions, and better wages than those that failed to follow such market-opening policies (OECD, 1996; OECD, 1998). To the extent that rising trade and investment flows appear to be associated with downward pressure on the real wages of lesser-skilled workers in some countries, this mainly reflects the impact of changes in technology and business organization rather than the increasing relative importance of international transactions to national economies (Murphy et. al., 1998; Lawrence et. al., 1993).
Apart from this, it is worth noting that wages and social standards have remained high in the comparatively rich OECD countries, despite the growing role played by international trade and foreign investment in their overall economies. According to a recent Canadian econometric analysis, after controlling for the principal factors likely to influence real wages over time, international trade appears to have exerted a positive impact on the wages of both more and less educated Canadian workers (Zakhilwal, 2000).
What about the location decisions of multinational corporations (MNCs)? Here, too, the data provide little support for the claims advanced by foes of globalization. First, the vast majority—70 percent or more—of worldwide foreign direct investment takes place not in poor countries with low wages and standards, but in higher-wage economies like the US, Britain, Ireland, Canada, Germany, and France. Second, even in the case of developing nations, a sizable part of the investment activity of MNCs is concentrated in relatively affluent regions (e.g., Chile, Taiwan, Brazil, Hong Kong, Singapore, Malaysia, and the more developed coastal provinces of China). Indeed, the poorest developing countries often receive little or no outside investment, even though they have extremely low wages and non-existent standards—most of Africa being a case in point.
The impact of trade on the environment has recently begun to figure prominently in international policy discussions. Many green lobbyists argue that by encouraging countries to produce for external markets, trade liberalization leads to a decline in environmental quality. A related worry is that globalization is causing developing countries to become "pollution havens," thereby accelerating the degradation of their environments.
A recent study by Brian Copeland and Werner Antweiler of the University of British Columbia and University of Wisconsin economist Scott Taylor disputes this view. They find that international trade results in only minor changes in a country’s "pollution concentrations." After accounting for the rise in income per person and changes in the composition of output linked to the growth of trade, they conclude that freer trade is actually good for the environment.
This accords with the common sense observation that rich countries invariably boast cleaner environments than poor ones. Since trade is a principal means by which countries can grow richer, liberal trade and investment policies should pave the way for higher environmental standards. As a recent OECD survey concludes:
Trade and investment liberalization, by promoting a more efficient use of resources and sustaining growth, can make a vital contribution towards creating the conditions necessary for environmental improvement. The evidence shows that there is a positive link between countries’ environmental performance and rising per capita income levels, security of property rights, and administrative efficiency. (OECD, 1998, p. 15.)
In summary, most economists agree that openness to outside investment and foreign trade leads to higher per capita incomes. It follows that adherence to market-opening economic policies makes it increasingly likely that countries will eventually adopt more stringent environmental and labour standards. Developing countries hoping to improve their economic and social circumstances would therefore be well advised to ignore the earnest but ill-informed advice offered by today’s hordes of anti-globalization activists.
References
Antweiler, Werner, Brian Copeland, and M. Scott Taylor (2000). Is Free Trade Good for the Environment? Department of Economics, University of BC, July 4.
Lawrence L., and M. Slaughter (1993). "International Trade and American Wages in the 1980s: Giant Sucking Sound or Small Hiccup?" Brookings Papers in Economic Activity, Macroeconomics #2.
Murphy, K., W. Riddell, and P. Romer (1998). Wages, Skill and Technology in the United States and Canada. National Bureau of Economic Research Working Paper 6638.
Organisation for Economic Cooperation and Development (1996). Trade, Employment and Labour Standards: A Study of Core Workers’ Rights and International Trade. Paris: OECD.
Organisation for Economic Cooperation and Development (1998). Open Markets Matter: The Benefits of Trade and Investment Liberalisation. Paris: OECD.
Zakhilwal, Omar (2000). "The Impact of International Trade on the Wages of Canadians," Statistics Canada, Family and Labour Studies, No. 156, December.
Jock Finlayson is Vice-President of Policy at the Business Council of British Columbia. He holds a Master’s degree in Management from Yale University and undergraduate and MA degrees from the University of British Columbia. An earlier and shorter version of this article appeared in the Globe and Mail Report on Business, January 12, 2001.
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